NC tax cuts are taking a toll

The General Assembly’s Republican leaders appear remarkably calm about what is shaping up to be either a serious budget shortfall or an income tax shock for those who have not had enough state tax withheld.

Tax revenue flowing into the state is running about $190 million below projections following tax cuts that took effect in January. That is worrisome because state spending already is at a spartan level. There’s no slack for filling the budget hole with easy cuts. The state could dip into its rainy day fund (even though it’s not a rainy day), but that simply puts off the budget reckoning for a year.

State Rep. Skip Stam, a Wake County Republican and House speaker pro tem, said the budget shortfall isn’t much given the state’s $21.1 billion budget and the federal government’s spending on North Carolina’s Medicaid and transportation projects. He told Time Warner Cable News, “The difference is hardly even a rounding error.” A rounding error? It seems like more than that to state agencies that are trying to meet the needs of a growing state. Their budgets have been tightened first by the Great Recession and then by Republicans taking control of the General Assembly in 2011.

State funding needs

The Department of Public Safety, for instance, just told a legislative committee that it needs an additional $20 million to better treat more the 4,600 inmates with mental illness. The state courts system is so strapped it’s running out of money to pay jurors. Local schools systems are coping with reductions in state funding. The University of North Carolina system has been repeatedly cut, and its funding could shrink more since it represents a large share of state spending.

The cause of the shortfall is a tax overhaul that took effect last January. It expanded the sales tax base, cut corporate income taxes and condensed three personal income tax brackets into one lower rate. As a result, state tax revenues year over year are down $410 million and $190 million below projections.

Too early to know

State Budget Director Lee Roberts said the extent of the shortfall won’t be clear until sales taxes from the Christmas shopping season come in. “We’re not saying that we’re not going to have a problem,” he said last week. “We’re saying it’s too early to tell.”

One possible reason there’s a gap is that many taxpayers did not properly adjust their withholding under the new income tax rules. If that’s the case, there may be a surge in revenue in the spring, but there will be a lot of unhappy taxpayers who will owe rather than get the refund that typically goes to about two-thirds of filers.

Whatever the reason and the final numbers, it’s not too early to say the tax cuts are creating unnecessary headaches for state agencies and preventing investments in education, infrastructure and services for the needy. It’s one thing to be frugal about government budgets. It’s another to give money away in tax cuts when the state is falling short of meeting its needs.

Some states are struggling because of the drop in oil prices. But North Carolina has a self-inflicted problem. The national economy is improving, and states are spending more, but North Carolina keeps tightening its belt. The National Association of State Budget Officers reports that 43 states increased their general fund spending in fiscal 2015. And that’s after a healthy increase in fiscal 2014 when average state spending increased by 4.9 percent, the fastest rise in general fund expenditures since fiscal 2008.

North Carolina, by contrast, is cutting its revenue in hopes that smaller government and lower taxes will spur the state’s economy. But that result, like the missing $190 million, has not shown up.

It's Getting Worse

North Carolina’s public schools are in a crisis. Teachers are leaving our classrooms in record numbers due to low pay and poor working conditions. Years of neglect have left our schools overcrowded and underfunded. It’s time to stop cutting and start investing in our public schools.